My husband and I own a two-unit rental property. We get $600 per month for it. We currently place the money into a savings account and use it to pay property taxes and insurance, which total $3,600 a year. We plan to use the leftover money for future real estate purchases and property repairs. Is a savings account the best place to keep our money?
—A. Richardson, New Orleans
Saving $600 per month from your rental property and paying $3,600 a year in taxes and insurance leaves you with $3,600. Unfortunately, in my opinion, that sum is not quite enough to adequately take care of repairs and more real estate purchases. And keeping the amount you’d save in an account earning 2% or less won’t really be helpful since real estate prices are appreciating far faster than the interest you’ll earn. I would suggest using your savings to enhance the appraised value of your current rental property.
Refinish hardwood floors, add stylish lights or brass fixtures, renovate a kitchen or bathroom. If you make repairs that add value, you’ll create equity you can use for purchasing property in the future.
After a year, look to establish a home equity line of credit from which you can draw when you are financially ready to take on another mortgage and increase your real estate holdings. Make sure you factor in escalating energy costs and insurance before you increase your investment property holdings.